Econ Focus

The Winding Road of Wine Distribution

Most businesses don't give a second thought to shipping their products across state lines. For many winemakers, however, reaching their customers isn't an easy process.

The federal government inspects winemaking facilities, approves labels, and requires every winery to have a license. State governments, however, were given almost total control over the sale and distribution of alcoholic beverages when Prohibition was lifted in 1933. Since then, state regulators have been torn between two goals — encouraging free trade and reducing alcohol abuse. This internal debate has resulted in a morass of rules and regulations that vary from state to state, preventing many consumers from simply calling a winery to place an order.

Eleven states, including Maryland, prohibit all direct shipments of wine, beer, or spirits to their citizens, even within state borders. Restrictions elsewhere are less severe, but can still be significant.

For example, North Carolina residents can have their favorite wine shipped directly from a local producer, but they cannot receive any shipments from out-of-state wineries. The opposite is true in South Carolina — consumers can't receive direct shipments from local wineries, but they can purchase out-of-state products through retail outlets, which place orders with their wholesalers.

Generally, states try to steer wine sales through a closely regulated, three-tiered distribution system. The rationale is that producers, wholesalers, and retailers within the system can be held responsible for ensuring that buyers are above the legal drinking age and not imbibing excessive amounts of alcohol. In addition, North Carolina and 17 other states, plus Montgomery County, Md., assume the retailer role in the distribution process in order to remove economic incentives to maximize sales.

Winemakers say that while this system works fine for large producers, smaller facilities don't produce enough wine to make mass distribution economically attractive. "Distributors don't have the time to come here to pick up one bottle of wine," says Joel Dalmas, co-owner of Waldensian Heritage Wines in Valdese, N.C.

That's why Dalmas and other Tar Heel winemakers make most of their sales when people visit the premises for a tasting. State laws passed in 2001 broadened this distribution channel by permitting wineries to sell by the glass and to operate three additional tasting outlets.

Another problem with the current distribution system, say winemakers, is the inadequate number of wholesalers to serve the growing number of suppliers in the market. "It's like a funnel — there are over 2,000 wineries in the United States, but less than 300 distributors," estimates Jerome Douglas, senior vice president of the Biltmore Estate Brands Group in Asheville. "For somebody with a small winery, they aren't going to be able to find a distributor or, if they do, they may not get enough attention."

In general, "there is a lot of competition" from well-known wine producing states like California and from foreign wineries, adds Patricia McRitchie, who handles regulatory compliance and marketing for Shelton Vineyards in Dobson, N.C. "If you want to get onto a restaurant's wine list, there may be only 20 slots available."

Therefore, North Carolina wineries tend to stick to local markets. Of course, even these markets could become saturated as more wineries open in the state.